Adrian Orr: Decision to hold official cash rate ‘literally down to the uncertainty of the day’

Finance and Expenditure Committee/Facebook
Adrian Orr is concerned about the situation recent home buyers may soon be in

The Reserve Bank spared businesses and consumers from a rate rise on Wednesday but governor Adrian Orr makes clear it was only intended as a temporary reprieve to protect our collective fragile psyche.

Interest rate changes take time to bite but Orr said the decision to hold for a few weeks was “literally down to the heightened uncertainty of the day”.

“In a few weeks are we going to be any wiser? Possibly not but by that stage people will understand what is going on.

“We have not lost a lot. It is not like demand is going to get ahead of us in the next few weeks.”

All indications are that the Reserve Bank will wait until its next monetary policy review on October 6 to make decisions on its delayed official cash rate rise, rather than implement an out-of-cycle hike if the Delta outbreak is cleaned up sooner.

“At this point that is what we think,” Orr says.

More important than the short delay, he suggests, is that the bank has charted a course to higher rates and the market is listening.

“It is not clear what would deviate us from our main path of wanting to reduce stimulus at the moment. Even with Delta that still remains the obvious path for us, subject to hearing otherwise.”

The Reserve Bank’s projection is for the official cash rate to climb to about 1 per cent by early next year and 2 per cent a year after that, with, Orr notes, “at least a couple of moves indicated in there between now and the year-end”.

If that plays out as expected, he suggests that may not be too dramatic, except for anyone who has got in close to the top of their head in mortgage debt.

RESERVE BANK OF NEW ZEALAND/YOUTUBE
Reserve Bank governor Adrian Orr announces the OCR is on hold on Wednesday.

The Delta outbreak and lockdown has not only been a shock in itself, the speed of transmission has also been a reminder that the country may have a series of tough choices ahead.

“I am going to use language that will probably get me in trouble but this thing started as a ‘pandemic’ globally and it has morphed into an ‘endemic’ globally – meaning it is going to be around for a long time,” Orr says.

“The best way for us to be thinking about managing it is to assume it is endemic and there will always be precautions which will be some form of restrictions on the movement of people, and that there will be some short-term severe disruptions from time to time.

“That is pretty much where the United States and a lot of Europe are getting themselves to now.”

It is also the more sensible way for businesses to think about how they run, he says.

“They need the capacity to operate when things are open or shut and to meet demand under all conditions, which we have seen they are very capable of doing.”

Adrian Orr says the global pandemic is now a ‘’global endemic’’.
MARK TAYLOR/Waikato Times
Adrian Orr says the global pandemic is now a ‘’global endemic’’.

Orr agrees you can run the argument – somewhat counter-intuitively – that ongoing Covid lockdowns may mean the bank needs to set the official cash rate at a higher level than it otherwise would.

That is because Covid restrictions that disrupt supply chains and knee-cap productivity growth will be inherently inflationary if the fiscal support measures implemented around the world in response to lockdowns are successful in holding up consumer demand.

“We have seen the role government fiscal policy plays globally; how successful that has been in propping up household and business balance sheets and increasing savings rates, and the higher propensity to consume,” he says.

“When the bounce-back comes, it just gets tighter. It is hard; there are inflation implications amongst all of this.”

But Orr says there could be a limit to the argument, if demand simply fell over – “if people just put out the white flag and said: it is too hard, I am just going to save every penny I have got”.

The Reserve Bank ran through some of the machinations in its monetary statement, concluding that the “neutral” interest rate at which monetary policy is neither expansionary nor contractionary had fallen over the past 20 years but that it was hard to say where to from here.

High asset prices and low productivity growth can only lead to a few outcomes though, and Orr foresees those including some combination of higher inflation and falls in asset prices such as shares and housing.

“I think you will see a combination,” Orr says but he leans towards asset prices falling back down to earth or – with luck – the earth gradually rising to meet them.

“At the moment there are a lot of elevated asset prices. I have great faith in prices always resolving,” he says.

“That is the quick way of reducing pressure in a bubble. When central banks adjust interest rates, the true test will be seen.”

 

 

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